Adobe Systems (ADBE)

The new creative suite has not brought in a large amount of sales because there is not enough reason to upgrade

Valuation Multiple. Although we find the company’s premium valuation (currently trades at CY2007 P/E of 30X and a CY2008 P/E of 26X versus the overall sectors median multiples of 26X and 22X, respectively) justified at this time (given its high growth profile and strong franchise compared to a number of other software companies), we also find further stock appreciation from current levels difficult, presently and over the next several months.

Fickle ad spending. Adobe depends on the advertising industry for much of its revenue, especially revenue stemming from Creative Suites. Though Flash positions Adobe to take advantage of the growth of interactive online advertising, the decline of the publishing industry could lead the company to lose significant new revenue. Moreover the typical Adobe customer is a creative professional who works in advertising. This means Adobe is reliant on fickle ad spending.

High Investor Expectations. High investor expectations is a matter of concern. Although Adobe reported a very strong quarter across metrics, we are concerned about ongoing high investor expectations—raising the bar for the company going forward.